Nestle cites 'robust' interest, plans to sell US chocolate business by March

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Dive Brief:

Nestle has decided it will sell its U.S. confectionary business by March of next year, according to Bloomberg. Analysts have estimated the value of the unit at between $1 billion and $3 billion.

Interest from potential bidders is "robust," a spokeswoman for the Swiss company told Bloomberg, helping pave the way for the planned divestiture.

Nestle's U.S. confectionery business — including such well-known brands such as Butterfinger, KitKat, Baby Ruth, SweeTarts and Nerds — posted sales of about $922 million in 2016, which were below internal expectations. The sale is not expected to include the company's iconic Toll House baking products, which remain a strategic growth brand in this country.

Dive Insight:

CEO Mark Schneider has been actively looking for ways to tighten the company's overall focus since he took over the top leadership position in January. Nestle signaled back in June that it would be analyzing whether to sell its chocolate portfolio — which lags behind market leaders Hershey and Mars.

Also in June, Dan Loeb's Third Point hedge fund took a $3.5-billion position in Nestle, or about 1.25% of the company's shares. The hedge fund has publicly outlined changes that the maker of Lean Cuisine, Nescafe and Butterfinger can make, including improving margins, innovating its core business and selling non-core assets.

As a result, Nestle, a 112-year-old global company, has had to up its game due to pressure from an activist investor, along with the usual pressures to grow and innovate in today's uncertain food climate. Nestle has been adjusting its product portfolio in line with Schneider's vision, as shown by its recent investments in Freshly, a meal kit startup, and also inBlue Bottle Coffee andSweet Earth. This week, the company said it is selling two of its tea brands.

According to Reuters, Euromonitor International has reported that the volume of confectionery products sold worldwide rose just 0.5 percent in 2016-17 after falling for two years. However, growth in the U.S. chocolate market — driven by demand for premium varieties and sugar-free and dark chocolate products — is expected to surpass the $30 billion mark by 2021, according to a 2016 TechSci Research report.

Sales of Nestle's candy products have slumped in the recent past, and the company's goals are to consolidate and achieve cost savings. Nestle reported its slowest global sales growth in more than 20 years earlier this year, Fortune noted, and while the U.S. is the company's largest market, selling the confectionary business would only affect 3% of sales in the U.S.

The decision to sell "represents a compelling opportunity for U.S. candy companies to consolidate the category at a critical moment. Consumers have cut back on sugar-based snacks and shifted more of their shopping online," Robert Moskow of Credit Suisse wrote when the decision was first announced.

Potential suitors for Nestle's U.S. candy business include Hershey, Mars, and smaller European candy makers such as Lindt/Ghirardelli/Russell Stover and Ferrero. Another possible is long-shot Leaf Brands, a relatively small company that makes Hydrox sandwich cookies and owns a couple of former Nestle brands. Any of them are likely to gain increased synergies and economies of scale if a deal occurs. Pladis, the Turkish company that owns U.S.-based Godiva Chocolatier and McVitie's biscuits in the U.K., decided against a bid.

Even though Nestle is positioning itself as more of a health, wellness and nutrition company, it isn't leaving sugar behind. According to Reuters, the decision to sell relates more to its weak competitive position in the U.S. confectionary market than it does to any negative attitude about chocolate.

In fact, Nestle has developed a natural way to structure sugar that would allow manufacturers to use up to 40% less without reducing the sweetness of products. The company is reportedly patenting its discovery of this hollow and faster-dissolving sugar and plans to release confectionery products using it starting next year.

The future of Nestle's U.S. confectionary segment has been a source of speculation since June, when the company first made its announcement, but the answer will be coming very soon.